RHG on borrowed time

RHG yesterday provided a clearer, and stark, warning to investors of the implications of any inability to work out terms with the funders of its closed and declining mortgage book.

Of the $7.4 billion mortgage book of RHG at June 2009, $5.2 billion is funded by a handful of banks. (Note that this newsletter last week incorrectly reported the mortgage assets were $12 billion.)

In full financial statements published through the ASX yesterday RHG wrote that "a high level of uncertainty remains in the current market, which will likely result in the group selling further mortgages at par in repayment of warehouse facility balances."

The firm also warned, in more familiar language, of the risk of a default on its warehouse facilities if they are not renewed and the mortgages are not sold.

RHG and its funders have been in dispute over the appropriate funding margin payable for the warehouse facilities.

While at current margins - and at current retail interest rates on the back book - RHG is extracting a high yield from its portfolio, this profitability may prove transient.

RHG reported a net profit of $120 million for the year to June 2009, with a profit of $69 million in the December 2008 half and $51 million in the June 2009 half.

In a preview of the full financial statements published by RHG last week the firm said it expected to report an operating profit in the 2010 financial year of between $55 million to $65 million, though this forecast was heavily qualified.

RHG built up its mortgage portfolio as Rams Home Loans before the credit crunch ruined the business model and the company sold the Rams brand and network to Westpac.